Expert: Arthur Naman - 9/8/2008

Question
Explain why a small business such as this might use the periodic inventory system.(mountain mabel's is a small general store)

Answer
Many businesses cannot track a specific individual inventory item, rather inventory is tracked by doing an inventory count at the end of a period, then using that count as the basis for ending inventory for the end of that period (usually annually).

For a small store suppose you determine when to buy more inventory during the year based on just looking at the store shelf to determine when to buy more, canned soup for example. At the end of each year, you can count the number of cans of soup on hand, then:

BI + P - EI = COGS

BI - beginning inventory
P - purchases
EI - ending inventory
COGS - cost of goods sold


Each can of soup is not tracked, only the totals.

If this is not clear, please ask a follow-up question.